The retail unit of Reliance Industries Ltd (RIL) could be the next engine of growth for the oil-to-telecom conglomerate, according to global brokerage and research firm Goldman Sachs. In a report this week, analysts at Goldman Sachs said that the retail EBITDA could grow 10x over the next 10 years. “During the macro downturn, RIL has focused on building strong digital capabilities and we believe the scale-up in omnichannel offering is driving sizeable market share wins. We see a six-fold increase in grocery organized retail penetration in India by FY30, coupled with 15% market share gain for RIL,” the report added. Mukesh Ambani’s RIL currently holds a 41.5% market share in organised retail space.
Revenues to accelerate
RIL has developed Reliance Retail as a robust business unit over the past couple of years, for which global investors lined up last year. The business showcased significant growth pre-Covid, with core retail revenues growing 5x during FY16-FY20 at a 50% CAGR. Although the business has seen a slowdown during the pandemic, RIL has focused on building strong digital capabilities while continuing to expand its physical reach which may result in significant market share wins ahead. Goldman Sachs expects RIL’s core retail revenue to grow at a 36% CAGR over next four years to $44 billion and expect e-commerce revenues to be 35% of total revenues in FY25 at $15 billion.
What could drive retail business growth
The brokerage firm sees four catalysts for significant grocery-led growth. The primary driver is expected to be the Omni channels leading to market share wins. Reliance Industries has invested significantly to scale up digital assets. The company has a large online grocery store, an offering that may be unparalleled in the country. Goldman Sachs expects RIL’s omnichannel approach to result in 50% market share for RIL in online grocery by FY25E.
Demand for fresh vegetables and fruits in India is often met by small vendors. The noted highlighted that, Reliance Retail, the largest fresh food retailer in India sold 0.66 mn tonnes of fruit, vegetables and staples in FY21, accounting for only about 0.1% of the total production in India. Currently, only 5-10% of grocery sales for Reliance are fresh, Goldman Sachs expects this to rise to mid-teens levels in 10 years.
Retail business is further, anticipated to grow with the help of private labels. This move would not only aid in driving pricing power but would also maintain a supply of products. “On average private labels on Jiomart are 36% lower priced than brands in personal care, 20% in-home care and 20% in packaged foods and beverages,” the note said. Lastly, Reliance Retail’s focus on tier-2 and tier-3 cities is another catalyst that is may help it gain market share and drive growth.
Rating and upside potential
Reliance Industries share price has underperformed the Nifty 50 index by 39% since September last year. “Risk reward looks favourable, with 40% upside in our bull case and 14% downside in bear case,” Goldman Sachs said. The brokerage firm has a ‘Buy’ rating on the stock with a target price of Rs 2,425, translating to 7.7% upside from current levels in the next one year.